Adveq: ‘D-day’ will be delayed for large US buyouts

The Swiss fund of funds manager sees a number of key dynamics driving the private equity market over the next few years, including a protracted healing process in the US caused by long-lasting and flexible financing structures.

While some smaller private equity deals in the US will unravel during 2010, many of the country’s larger buyouts will not run into trouble for at least four years, says Swiss fund of funds manager Adveq.

“The US is likely to go through a long healing process before fully recovering. It will take time to deleverage the market,” Adveq’s managing director Peter Laib told PEO.

D-Day will not come for many larger companies for a while yet

Peter Laib

“Some of the smaller deals will unravel during 2010, but many of the larger more recent deals will have financing packages which will run until 2012 or 2013 – that’s if they can continue servicing the debt,” he said, adding “D-day won’t come for many of the larger companies for a while yet…especially those with cov-lites or no covenants at all.”

Peter Laib

Laib pointed to the additional need for consumers in the US to deleverage, which will also take time.

The Blackstone Group president Tony James defended the use of the “much-derided covenant light” in a recent article in the Financial Times, suggesting that in many cases it will preserve the lives of businesses through the economic downturn.  

Jon Moulton, managing partner of Alchemy Partners, responded by likening covenant light loans to a respirator preserving the life of an ill person. “Avoiding disease is generally better than providing for surviving it,” he said.

The conversation with Adveq came after the firm’s annual press conference in Frankfurt, at which the firm said that current market dislocations are likely to result in a power shift from the Western world to Asia, which will be least affected by reduced GDP growth and earnings contractions.

This power shift goes beyond macroeconomics, according to Laib. Western firms, which would previously have been in a position to acquire complementary Asian business, may find it harder to finance acquisitions. Meanwhile, as Asian firms’ growth is driven by growing local demand, they will likely become the buyers.

Adveq also predicted a return for private equity as an asset class to its core differentiating values of “proprietary deal sourcing, real operational and strategic value add and strong exit opportunities”.